Sunday, March 10, 2013

A Few Comments on the IIED's "Assessing the Costs of Adaptation to Climate Change"

Given my ongoing interest in climate change adaptation, I sat down and skimmed this this 2009 report on the cost of climate change adaptation. This 116 page report uses the word "incentives" just once and never mentions the words "technological progress". This strange report engages in a "top down" central planning exercise counting how many billions of dollars will be needed to be spent to achieve climate adaptation.

Here is a sense of the "top-down" exercise:

DIRECT QUOTE:

Water supply. The water estimate (Kirshen, 2007) considers the effect of additional water demand and changes on the supply side. Investment decisions are made in anticipation of 2050 water needs.

Human health. The health estimates (Ebi, 2007) are the extra prevention costs for three health issues: malnutrition, malaria and diarrhoea. The health impacts are based on the Global Burden of Disease study (McMichael et al., 2004).

Coastal zones. Coastal protection costs are based on the DIVA model (Nicholls, 2007), which considers a limited set of adaptation options that are applied globally. Uniquely, the coastal estimate considers both adaptation costs and residual damages. For long-life defence infrastructure, investments are made in anticipation of sea-level rise in 2080.

Infrastructure. The infrastructure estimate adopts the World Bank (2006) methodology, using insurance data to determine the share of climate-sensitive investment, and applying a percentage increase on current infrastructural investment to suggest additional costs for climate-proofing new infrastructure. (However, the background paper by Satterthwaite (2007) took a different approach.)

Ecosystems. An indication of adaptation costs for ecosystems was derived from the costs of increasing protected areas to at least 10% of the land area of each nation or ecosystem, although it was not possible to split this into baseline costs of meeting current deficits and incremental adaptation. See Berry (2007).

The five categories listed above are all important for our long run standard of living. Permit me to discuss each of the big five in order.

Water Supply --- The rise of the smart meter will provide real time information to consumers about their own consumption. Water utilities can use time of use pricing and this will induce conservation in the short run and long run. As water prices rise, innovators will have an incentive to devise new ways of augmenting our water supply and ways of recycling our water. The net effect of this better pricing will be that the IIED vastly over-states the necessary investment. This organization also faces the challenging of disentangling the marginal extra investment in water infrastructure caused by climate change. In the developing world, nations are building water treatment systems because they are growing richer and their population is urbanizing. This is response to the need to urbanize (which is a climate change adaptation strategy).

Human Health --- As the developing world grows richer, the three health issues listed above will continue to decline as a threat. Clean water, access to better food and health care will help to reduce the death rate from these diseases. Economic development and free trade reduce these threats and reduce the likely billions that the IIED claims will need to be spent on these serious challenges.

Coastal Zones and Infrastructure --- As shown by Hurricane Sandy, cities can be resilient in the face of terrible storms if the area has a robust economy. The IIED does not discuss how economic development reduces the costs posed by natural disasters. We are also always rebuilding our cities as depreciation takes place. How does the IIED distinguish between investment that is required because of standard depreciation (i.e old buildings falling down and repairs for roads) versus accelerated depreciation caused by climate change? If climate change causes damage to a coastal area, is there a "silver lining" that the new infrastructure (while costly) will reduce the damage caused by the next natural disaster because of improvements in engineering techniques. The 116 page piece never discusses new knowledge and new ideas and innovation reducing the price of adapting to the new challenges that climate change will pose.

Ecosystems: Here is a direct quote from the report:

"The study closest to identifying actual adaptation costs is for the Netherlands, where it has been

estimated that €1 billion are spent on nature conservation, with €285 million for managing

national parks and reserves and €280 million for new reserve networks and habitat improvement.

This action was aimed at reducing the threat from habitat fragmentation and other sources.

The planned national reserve network will reduce the vulnerability of ecosystems and species to

climate change and thus a (significant) proportion of the above costs could be considered as

climate change adaptation costs." (see page 97)

Note the strange double counting here. Does Holland only invest in its national parks and nature conservation to adapt to climate change? Such investments offer a stream of benefits such as beauty and leisure opportunities. To attribute all of these accounting expenditures to "climate change adaptation" is to engage in accounting tricks. A good economist would estimate what is the extra expenditure that Holland will engage in to protect ecosystems because of climate change. This would be the estimate of the marginal cost of climate change adaptation.

My Summary

This strange "macro" report never discusses any Micro issues of how rational firms, households and governments will respond to new challenges induced by climate change. Ultimately, climate change is a micro-behavioral issue. What incentives would induce self interested households, firms and governments to take actions to reduce their exposure to climate change risk? If households move away from areas they understand are risky, if firms produce new solutions to help households to adopt, if governments adopt new rules to protect their citizens and invest in public goods and reduce international trade restrictions, how much climate change risk can be avoided at low price? The report doesn't bother to discuss any of these issues.

Now, I must admit to one issue here. One of the authors of this report, David Satterthwaite, wrote a tough review of Climatopolis. If this is the best work he can do on this important topic, then he needs to retrain and take some Ph.D. Econ classes at LSE. We are both graduates from that great school but I think we studied different subjects while there.